"Global Macroeconomic Outlook & Anticipating Global Energy Demand"

Speech by HE Abdalla Salem El-Badri, Secretary General, to the 4th LPGtrade Summit, Doha, Qatar, 9-11 November 2009 - Delivered on his behalf by the Director of Research Division at the OPEC Secretariat, Dr. Hasan M. Qabazard.

Ladies and gentlemen:

Good morning. It is a pleasure to be here with you today.

I want to extend special thanks to the Deputy Premier and Minister of Energy and Industry, His Excellency Abdullah Hamad Al-Attiyah, for hosting this important event.

My theme this morning is the global economy — with specific reference to the oil and gas industries. Allow me to first share some thoughts on recent global events. I will then make some comments on the outlook for our industry.

Crisis & Recession

Triggered by a financial crisis that began in 2008, we have experienced the deepest and most synchronized economic downturn since the Great Depression. The consensus suggests that the roots of this turmoil can be found in the unregulated mortgage and credit markets of the world’s industrialised economies. From there, it has fast spread to countries around the world.

This has resulted in an economic landscape that for the past year has been characterized by decreased industrial production, declining capital flows and a steep fall in trade. In addition, per capita GDP has fallen, wealth has eroded and unemployment levels have risen. (These are now close to 10% in the US and the Euro-zone.) Problems also persist in the financial sectors of many countries.

As a result, recent estimates for world economic growth in 2009 have been revised downwards — from initial forecasts of 3.9% to minus 1.2%.

It is important to note that the fiscal and monetary stimulus offered by advanced countries and major emerging economies have had a positive effect. These measures have been instrumental in stabilizing the global economy. However, it is still too early to talk about a consolidated recovery. Many sectors are still facing serious challenges.

In fact, the financial crisis and the economic downturn have had a profound impact on energy markets — and the oil and gas industries in particular. There has been unprecedented volatility and a significant contraction in world demand, as well as deferrals in energy projects and investments.

Extreme Price Volatility

It’s important to recall that much of this global turmoil took place while we were seeing extreme price volatility in the crude oil markets. Oil, like other commodities, was being used as a financial asset. And, in combination with the depreciation of the US dollar, substantial levels of investment capital were flowing from the financial to the commodity markets.

This increased speculative activity in global commodity markets led to extreme fluctuations in prices. As OPEC said at the time, the magnitude of this price volatility was not at all consistent with market fundamentals. There were days last year when the crude oil price fluctuated by $16/b. In July of last year, crude prices reached a peak of $147/b. Then, driven by the global economic downturn, they plummeted to low $30’s in December.

Such price volatility makes for unsuitable conditions for investments. In an industry like ours, marked by long lead times and high capital costs, price volatility undermines the ability of oil and gas industries (and their investors) to adjust to market changes.

Stability, on the other hand, generates certainty and makes sustained investments in capacityexpansion projects feasible. Oil price stability then is not just our desire. It is an industry need.

Volatility — and the risk of instability it represents — is a constant challenge for OPEC. But the Organization has always been ready to take the necessary steps to restore balance in the market. For example, in December, despite significant oversupply in the market and sufficient stock levels, prices fell to extreme lows. In response, OPEC decided on a downward adjustment to its production in order to avoid a further fall in prices.

Such actions are in line with OPEC’s ongoing commitment to market stability. But continued stability — and future supply levels — depend on the promotion and improvement of greater consistency and transparency in the market.

That is why we are encouraged to see steps now being taken in the US and elsewhere to introduce regulatory reforms to the financial markets and commodity trading practices. Such measures are supportive of what OPEC has said all along about the role of speculative pressures on prices — and the damaging consequences of extreme price volatility.

Demand Contraction

While there has been some recovery in crude oil prices in the past year, the oil industry continues to be affected by the global economic downturn and constrained demand levels. Falling consumer income levels and contractions in manufacturing have led to a significant erosion of aggregate demand.

Even electricity — a sector that has traditionally been quite resilient — has seen a drop in consumption.

There are some indications that US consumption is gradually recovering from steep historical declines. And earlier forecasts of world oil demand growth in 2009 have even been revised upward by 0.2 mb/d, to stand at minus 1.4 mb/d.

Considering the existence of ample supplies, low refinery margins and stock overhang, OPEC chose to maintain production levels at its recent meetings. This again demonstrates the Organization’s commitment to keeping the market well-supplied, responding to economic conditions and adjusting to ever-changing circumstances.

Prospects for a Recovery

As we move forward, the global economy continues to face many risks and challenges. But there are some positive, promising signs. According to recent analysis, the second quarter of 2009 marks the bottom of the global recession. This has been supported by comments from G-20 leaders, as well as IMF and World Bank officials.

OPEC’s forecast for 2009 world GDP growth stands at minus 1.2%. However, for 2010, the forecast for 2010 now shows positive world GDP growth of 2.7%, raised from an initial forecast of 2.3% in July.

Only 0.5% of this growth will come from OECD economies. Instead, it’s the emerging economies of China and India that will lead the way, with expected 2010 growth rates of 8.5% and 6.5%, respectively.

In line with global growth expectations, there are signs that overall global demand contraction will ease in the fourth quarter. The consensus is that oil demand growth will return after two full years of contraction. This suggests that demand growth will be 0.7 mb/d in 2010, and will gradually rise to 1.2 mb/d by 2013.

Most of this demand growth will again be in non-OECD countries, with transportation, industrial and petrochemical industries leading the way.

In terms of investments in the oil and gas industries, we should recognize that last year’s market volatility and low price environment had an adverse impact on projects. The instability discouraged investments projects in both OPEC and non-OPEC countries, and many other projects were delayed or cancelled. But with current prices today — and signs of a rebound in global economy next year — we are seeing the re-activation of several OPEC projects.

All these indications are in line with OPEC’s expectations. While we remain cautiously optimistic, there are signs that we are moving into positive territory for 2010. But we recognize that there are still many challenges ahead.

Energy Security

One of these challenges is ensuring market stability, and the security of supply and demand which it requires. This is what we call ‘energy security’. The future of our industries depends on energy security. And investments in projects depend on more clarity about expected consumption and demand levels. Without such clarity, there is only uncertainty — a known enemy of investments.

In the meantime, OPEC continues to maintain spare capacity of about 6 mb/d. Although this is costly, it allows OPEC to be ready to respond to sudden or unexpected supply disruptions. And while non- OPEC supply is growing, OPEC countries continue to invest in capacity in order to ensure that there will be ample supply — to meet consumer needs in the future.

There are other important challenges:

We are learning to adjust to new financial regulations that many countries have implemented in order to respond to the crisis and re-activate their economies.

Similarly, there is also pending environmental legislation in the world’s advanced, oil-consuming countries, which require that we all adjust to the realities of a carbon-constrained world.

Considering these new developments, OPEC acknowledges that new technology must be used to improve the environmental credentials of the fossil fuel industry. Some OPEC Member Countries are currently at the forefront of research and development into carbon capture and storage (CCS), a pioneering technology that has the potential to significantly reduce greenhouse gas emissions from conventional fossil fuels.

At the same time, the Organization recognizes that industrialised countries have a historic responsibility to lead the way in its development. But OPEC also sees a need for more predictability in these emerging energy policies.

In closing, let me say that it is important to remember that market stability is something that requires joint efforts. Those of us in the oil and gas industries are all stakeholders. We have a great common interest in achieving market stability for the sake of our investments, in the interests of foreign trade and in order to ensure a sustainable energy future.

But that future has to do with two fundamental things:

• improving the performance of the energy sector through collaboration, and
• enhancing the global economy for the whole of mankind.

Nothing short of these aims will do.

Thank you.